Centre’s focus shifts to expenditure

Centre’s focus shifts to expenditure
The Financial Express, November 19, 2009, Page 1

Sunny Verma, New Delhi

The government plans to take up a series of expenditure reform measures as a part of its strategy to roll back the fiscal stimuli and to meet the medium-term fiscal consolidation goal.

The Prime Minister’s Office and the Cabinet Secretariat, in concert with the finance ministry, are debating a proposal of India targeting a debt-to-GDP ratio of 65% as a medium-term objective, officials said. The current ratio is about 82%. This ratio, measured as a proportion of total public debt to gross domestic income, indicates the fiscal space a country has.

India’s debt-to-GDP ratio stood at 81.9% at 2008-end, compared with China’s 17.7%, Brazil’s 64.5%, Russia’s 5.8%, US’s 70.5%, UK’s 51.9% and Japan’s 196.3%, according to International Monetary Fund estimates. IMF expects India’s debt-to-GDP ratio to rise to 86.8% in 2009 and 88.9% in 2010.

Public debt encompasses debt owed by all branches of government—Centre, state, municipal and local bodies.

Officials familiar with the discussion told FE that it is the first time the government is shifting gear towards expenditure control as a key tool to fiscal improvement. The idea is to curb the runaway revenue expenditure, which are mostly operational expenses, like interest payments and salaries, and arrest the decline in the rate of growth of capital expenditure, which leads to asset creation and more revenue from existing assets.

The 13th Finance Commission, which is to submit its report in December, would suggest ways to prune non-plan expenditure and improve the quality of spending.

The seriousness of its intent can be gauged from the government’s decision last week to pare the fuel quota for bureaucrats. Government officials below the secretary’s rank are now entitled to a fuel quota of 200 litre per month, down from 300 litres a month.

This would result in monthly savings of about Rs 4,500 per official.

The government has so far relied upon the tax buoyancy in the last five years prior to the global economic crisis to improve its fiscal position. “For any fiscal consolidation process to be durable, there is a need to act on the expenditure front,” a senior official told FE.

This is also an indication that finance minister Pranab Mukherjee has taken on board Reserve Bank of India governor D Subbarao’s suggestion to focus on ‘expenditure compression’. The RBI has also asked the 13 th Finance Commission to suggest how much fiscal improvement can be achieved from the expenditure side. This is particularly significant as it highlights continued coordination between the RBI and finance ministry as they begin to unwind monetary and fiscal expansion.

“We cannot sit back and hope that tax increase will deliver fiscal consolidation on a platter,” Subbarao said last month in Istanbul. “Revenue expenditure has increased from around 12% of GDP during the period 2000-08 to over 15% now. We need to work seriously on expenditure compression,” he said.

The official also said the government will act upon Prime Minister’s Economic Advisory Council’s suggestion to put in place a medium-term expenditure plan. The council has argued that even without significant cuts, expenditure can be reduced this fiscal.

‘Since liability on account of pay revision and loan waiver have been settled, if the expenditure on various schemes are kept constant in nominal terms, there could be a reduction of 1.5% of GDP in the deficit next year’, the EAC economic outlook for 2009-10 said.